Innovation and Technology Policy: Lessons From Emission Control and Safety Technologies in the U.S. Automobile Industry

Abstract

This research explores processes of innovative activities that lead to the development of automobile emission-control and safety technologies in the U.S. automobile industry. Understanding the construction of these two automotive technologies is interesting for two reasons: 1) they were developed under command-and-control type government regulations designed to force the industry to develop new technologies by setting standards beyond industry’s current technical capability (“Technology-forcing” regulations); and 2) the two key federal agencies responsible for designing and implementing the two sets of regulations (the National Highway Traffic Safety Administration and the Environmental Protection Agency) were established in the same period, the late 1960s, creating an ideal “natural experiment” for analyzing processes of technological changes that involve development of two different technological systems under two different sets of federal laws and federal agencies, and one common regulated industry -- the automobile industry. Our key motivation in this research is to investigate whether “technology-forcing” federal regulatory standards imposed upon the U.S. automobile industry stimulated industry innovation; and more importantly, whether federal regulations conferred any competitive advantage on the domestic U.S. firms in the automobile industry, which has long been crowded by foreign automakers as well as foreign suppliers. By using patent application as a measure of innovative activities, we identified relevant patents in both automobile emission-control and safety technologies in the last forty years from c. 1960 to c. 2000. In addition to compiling patent application records, we extensively studied both existing secondary literature and published government and industry records and conducted targeted interviews with important actors across a variety of related institutions involved in the development. This qualitative and quantitative information was used to construct a historically based study on two simultaneously-developing automotive safety and emission-control technologies, so that we could compare and contrast not only the patterns of innovation but also the socio-political processes of technological development under regulatory pressures. Statistical results reveal a strong correlation between overall patent applications and major regulatory events in both automotive emission-control and safety technologies. This finding supports the idea that “technology-forcing” regulatory instruments can be effective in driving technological change. More importantly, for a separate model that tested the impact of regulation on patent applications by U.S. firms (after controlling for foreign patenting activities and firm market share), regulation was also found to be effective in driving innovation, but its impact was significant only in the early phase of technological change when regulations were first introduced in the early 1970s. Findings of this research provide interesting new insights on the “Porter hypothesis,” which claims that appropriately designed regulation will increase corporate competitiveness and motivate new process and product innovation. While this study provides an empirical evidence for the Porter hypothesis; the study also implies that the most significant impact of regulation on innovation and industrial competitiveness may only be positive and significant in the early phase of technological change when the market for new technology is immature and when more radical technological innovation is necessary to meet new, stringent regulations. Interestingly, the study also shows that the auto industry reacted differently to the expectations of the regulatory agencies; that is, the auto industry developed and introduced catalyst-based emission control systems in the 1970s as expected by the EPA. Yet the auto industry resisted implementing the airbag system for automobile safety that NHTSA actively pushed for in the early 1970s.